> Insider trading doesn’t cost anybody anything, it simply allows for more accurate pricing which benefits everybody.
Insider trading has an institutional cost: it's corrosive to trust in the market. Retail investors are less likely to make optimal investment decisions if they think that insiders are lurking around every corner. That trust is further diminished if retail investors believe that insiders are not just investing based on insider information, but speculating on higher-order instruments.
It's perfectly fair to note that our current regulations against insider trading aren't ideal, and that the SEC only catches a tiny fraction of all insider trading. But the threat of enforcement does serve as an important root of trust in the market, and removing it is unlikely to serve individual investors well.
> Retail investors are less likely to make optimal investment decisions if they think that insiders are lurking around every corner.
But the reality is that there are insiders lurking around every corner. The argument is essentially that we should seek to actively mislead retail investors instead of simply acknowledging this fact.
I think it would be dishonest to do so actively, which is why I try to acknowledge that the SEC's current ability to enforce insider trading laws is relatively weak and ineffective.
I think it's my civic duty to not only inform others of that fact, but also to advocate for better enforcement.
Good enforcement is impossible. You can never meaningfully hinder insider trading, far too many people have access to insider information. They don’t have to make the trades themselves either.
> I think it would be dishonest to do so actively
That is what the government is doing via legislation.
Good enforcement isnt impossible. Improbable, yes.
Every trade has to be disclosed. There isn't a block-chain involved, but their is an e-paper trail. We are on a technology forum in a time where ten people could probably put together a domain model that tracks potential conflicts based on peoples trades, google contacts, and linkedin profile. And any person who traded on insider information in the past probably leaves a pattern.
Fine, this feels needlessly pedantic but let me correct myself.
Good enforcement is impossible without subjecting anybody trading stocks and everybody they know to a completely unprecedented level of surveillance. This would have to go far beyond the wildest Snowden revelations.
Perhaps not completely impossible in theory, but absolutely infeasible in practice. Building such a system would also be likely to result in far greater chilling effects on the markets than insider trading ever could.
> enforcement is impossible without subjecting anybody trading stocks and everybody they know to a completely unprecedented level of surveillance
Why? Just look for a pattern of abnormal returns. (Hint: the SEC does this.) It's much easier to check for insider information after the fact than it is to profitably trade on it.
Insider trading has an institutional cost: it's corrosive to trust in the market. Retail investors are less likely to make optimal investment decisions if they think that insiders are lurking around every corner. That trust is further diminished if retail investors believe that insiders are not just investing based on insider information, but speculating on higher-order instruments.
It's perfectly fair to note that our current regulations against insider trading aren't ideal, and that the SEC only catches a tiny fraction of all insider trading. But the threat of enforcement does serve as an important root of trust in the market, and removing it is unlikely to serve individual investors well.